Insurer Rating Report - A financial services company

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Analytical Contacts:

Patrick Curboy, Senior Analyst pcurboy@, (646) 731-2320

Andrew Edelsberg, Managing Director aedelsberg@, (646) 731-2371

Fred DeLeon, Director fdeleon@, (646) 731-2352

Donna Halverstadt, Managing Director dhalverstadt@, (646) 731-3352

January 19, 2018

Executive Summary

Kroll Bond Rating Agency (KBRA) has assigned the following insurance financial strength rating (IFSR) to GCU (formerly known as Greek Catholic Union of the U.S.A. (GCU)) based on KBRA's Global Insurer & Insurance Holding Company Rating Methodology, published on October 10, 2017.

Rating

Entity GCU

Type IFSR

Rating BBB+

Outlook Stable

Action Assigned

GCU, headquartered in Beaver, Pennsylvania, is the largest, by asset size, Catholic not-for-profit insurance organization in the United States. GCU is a fraternal benefit society (or simply, fraternal) that was organized and operates under the Commonwealth of Pennsylvania's insurance statutes. GCU is a fraternal offering a

variety of life insurance products and annuities for the benefit of its members and their beneficiaries. Currently

serving over 43,600 adult and 2,300 juvenile members nationwide, GCU is licensed to write business in 22 states.

GCU is the parent company with a wholly owned holding company for-profit subsidiary, GCU Holding Company, Inc. (GHC). GHC was established in 1994 to develop the real estate adjoining the society's home office and country club complex. GHC is comprised of the following wholly owned subsidiaries: Seven Oaks Country Club, Inc. (SOCC), GCU Agency, Inc. (GCUA), and GCU Real Estate Company, Inc (GREC).

Ownership and control of the society is held and exercised by the adult members of GCU. Fraternal activities are conducted through participation by the delegates (elected by members of the fraternal lodges) through a representative governmental body at the quadrennial national convention. The national convention serves as the forum for election of the board of directors, which is the highest executive body of the society. Directors are elected for four-year terms and are required to meet on a quarterly basis.

Rating Rationale

The rating reflects GCU's solid balance sheet, stable membership base, net operating gains, and favorable capital trends. GCU is the 7th largest fraternal benefit society based on net admitted assets, and is focused on writing life insurance and annuity products, with a specific emphasis on increasing life insurance sales. GCU is engaged with several large distribution platforms to increase its outreach to new communities, in both existing and new geographies. The society continues to maintain an appropriate investment portfolio, in credit quality and duration, with net investment income over the past five years exceeding both fraternal and nonfraternal company peer averages. GCU continues to report solid revenue growth and consistent profitability across its annuity business, which has resulted in ample capital growth. Although the organization experienced some adversity during the financial crisis, GCU has successfully demonstrated its ability to adjust its product offerings, accumulate surplus, and reposition the company for profitability and growth. Since year-end 2009, GCU's surplus has grown by over 400%, achieving a new high of nearly $125 million as of September 30, 2017. Moreover, GCU has sound liquidity, good financial flexibility, and a low operating expense profile.

Balancing these strengths are GCU's noteworthy exposure to spread compression within its annuity block due to high crediting rates coupled with low new money rates as well as its current NAIC risk-based capital ratio being slightly below fraternal and non-fraternal peers. The society has notable exposure, although manageable, to reinvestment risk along with credit/default risk in its longer maturity bond holdings. The society also faces execution risks related to expanding its geographic reach and diversifying the business mix. Like its fraternal peers, GCU may be challenged to maintain its current membership in the future. The society relies upon strong, dedicated leadership to best serve its membership; hence, being able to develop adequate succession planning will be critical. Additionally, KBRA believes the society's corporate governance, operations (information technology initiatives and staffing), and enterprise risk management practices are still developing and would enhance the financial strength of the organization if modernized and upgraded.

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Credit Strengths

Strong capitalization growth; favorable trends in total adjusted capital (423% increase since 2009, as measured to year-end 2016 surplus and AVR, and continued growth, +13.2%, through Q3 2017)

Net gain from operations compares favorably to similar-sized fraternal peers; $114.9 million in cumulative gains (as measured at end of Q3 2017) since 2011 (21.7% five-year CAGR)

Well-established fraternal with roughly 46,000 members, representing a 17.1% increase since 2009 Historically low operating expense profile; ratio of general operating expenses to total assets has been below

0.54% on an annual basis since 2012 (current fraternal peer average is 1.73% and non-fraternal peer average is 2.14%) Above-average investment yield, 5.49% in 2016, while maintaining a generally good quality invested asset portfolio (93% of the portfolio is in fixed income with 86% held in NAIC 1 or 2 rated bonds) Strategically targeting a diversification of its business; plans to grow its life insurance portfolio along with its Medicare supplement products in addition to expanding into new geographies

Credit Constraints

Annuity block susceptible to spread compression (as of 9/30/2017, 79% of annuity reserves are held in products with a guaranteed rate of 3.0% or greater) and disintermediation (71% of annuity reserves have no or a minimal surrender charge)

Below peer average NAIC risk-based capital (RBC) company action level (CAL) of 287% at year-end 2016; peer average is 502% with a median of 427%

Elevated high-risk assets to surplus ratio at year-end 2016, driven by exposure to energy sector bonds. The society has taken action in 2017 to gradually reduce below investment grade holdings.

Notable exposure to reinvestment risk given product portfolio and required yield to meet guaranteed rates in the annuity block (downward trending yield-to-maturity with YTD 2017 fixed income purchases at 4.36% or 91 bps below the current yield at cost)

Business mix lacks true diversification as reserves are almost entirely interest-sensitive (between 93% and 96% as measured at year-ends 2012-2016)

Succession planning and key individuals risk; insurance and societal knowledge is concentrated among a select group of management and department leaders

Financial Metrics

GCU Balance Sheet

Total Assets Capital & Surplus (C&S) Asset Valuation Reserve (AVR) Total Adjusted Capital (TAC) Change in TAC from prior year C&S to Liabilities NAIC RBC (CAL) BIG Bonds to TAC

Profitability

Net Gain from Operations Net Income Net Investment Yield Return on Equity Return on Revenue

Key Insurance Metrics

% Annuity w/o surrender charge Avg. Face Amt. of Life Life Ins. as % of Total Reserves Lapse Ratio Current Liquidity Gen. Ins. Exp. to Total Assets

Q3 YTD 2017

$ 1.68 B $ 124.6 M

$ 18.2 M $ 142.8 M

$ 19.6 M $ 17.0 M

2016

$ 1.55 B $ 108.5 M

$ 17.6 M $ 126.1 M

21.4% 8.9% 287%

160.5%

$ 23.7 M $ 20.6 M

5.49% 23.8%

6.8%

71.0% $ 8 K 4.7% 0.7%

105.9% 0.46%

2015

$ 1.35 B $ 90.7 M $ 13.2 M $ 103.9 M

24.4% 8.3% 380%

76.4%

$ 22.0 M $ 22.1 M

5.79% 27.1%

6.9%

65.1% $ 8 K 5.2% 2.8%

105.9% 0.47%

2014

$ 1.20 B $ 71.8 M $ 11.7 M $ 83.5 M

38.2% 7.5% 358%

60.9%

$ 19.2 M $ 18.2 M

5.88% 31.5%

8.2%

63.7% $ 8 K 5.7% 4.1%

105.0% 0.49%

2013

$ 1.08 B $ 50.5 M

$ 9.9 M $ 60.4 M

29.3% 5.9% 290%

65.1%

$ 18.3 M $ 18.5 M

6.02% 41.7%

8.5%

61.7% $ 8 K 6.2% 1.8%

103.5% 0.51%

2012

$ 977 M $ 37.2 M

$ 9.5 M $ 46.7 M

26.9% 5.0% 233%

71.0%

$ 12.1 M $ 12.1 M

6.18% 37.0%

5.6%

65.9% $ 8 K 6.7% 1.9%

101.8% 0.54%

GCU

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Background

GCU, formerly Greek Catholic Union of the U.S.A., was founded 125 years ago on February 14, 1892 in WilkesBarre, Pennsylvania. GCU is a non-profit organization which provides financial and fraternal benefits to its members while promoting its heritage. GCU is domiciled in Pennslyvania and maintains its home office in Beaver, PA.

GCU was formed by the combination of 14 independent lodges located across Pennsylvania, New York, Connecticut, Illinois and New Jersey associated with the Greek Catholic Church. Lodges were originally formed at Greek Catholic churches (today they are called Byzantine Catholic and are members of the Eastern Catholic Church) to offer security and protection to their Rusyn1 immigrant founders. Many of these immigrants worked dangerous jobs in coal mines and steel mills and commercial life insurance companies would not insure them. When a member was seriously injured or killed, the lodge would assess a fee on the other members of the lodge. This was then collected and passed on to help ease the burden on the family suffering the loss. Today, in addition to providing protection to the Byzantine Catholic community, GCU's life and annuity products are available to all Christians.

The society is licensed in 22 states2 and Washington D.C. to sell a full range of annuity and life insurance products to meet its members' financial needs. In addition to annuities and life policies, the society's insurance offerings also include Medicare supplement products. Currently, GCU has roughly 46,000 members nationwide (95% are adult members) with over 60,000 active policies. The majority of GCU's business is generated in Pennslyvania (45% of direct written premiums/deposits in 2016) and Wisconsin (14%).

History of Fraternals Fraternal benefit societies came about in the late 1800s to assist the large numbers of immigrants coming to America. One of their more significant needs was to provide for families' financial well-being in the event of untimely death of the breadwinner. Although a conventional life insurer could also provide these services, fraternals were unique in that they united people through a common bond such as religion, ethnicity, or occupation. Moreover, the mission of these organizations has been to support their communities. The emphasis of relevant, important, and meaningful community service activities for fraternals is a critical differentiation from other membership organizations.

These not-for-profit, policyowner-owned companies are comparable to mutual life insurers in certain respects. Both types of organizations tend to focus on selling permanent life insurance through captive agents, and are managed conservatively with a long-term focus. Additionally, the mutual and fraternal business models are heavily based on relationships. Because of fraternals' demonstrated dedication to helping others that sets them apart from commercial insurers, these organizations maintain a federal tax exemption. Another key aspect of a fraternal organization is that the profits are often returned to the society's policyholders in the form of higher interest crediting rates and/or dividends than would generally be offered by commercial carriers.

Fraternals make membership more worthwhile than merely purchasing a life insurance policy or annuity. To start with, the member is part of an organization that is dedicated to providing members the tools needed to safeguard his/her family's financial security. But more importantly, the society helps members invest the profits from the sales of financial services products back into their own community through an array of service programs and activities.

Fraternal/Community Outreach GCU is dedicated to its mission of "Protecting Families, Promoting Faith and Fraternalism, Strengthening Communities." GCU utilizes its operating profits to support members' local communities in the form of grants, charitable donations, and scholarships. The society, through its members, supports community projects which

1 Generally, Rusyns are considered to be an eastern Slavic people or a part of the Ukrainian nation 2 States of admission are: AZ, CA, CT, FL, GA, IL, IN, MD, MI, MO, MN, NC, NJ, NV, NY, OH, PA, SC, TX, VA, WI, and WV

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include fundraising, donating to homeless shelters, food banks, public libraries, day care centers, schools for the blind, and homes for pregnant teens. Many member events are sponsored by GCU through its matching funds, fraternal grant, and "GCU Go Give!" programs. In addition, the society remains a significant benefactor to the SS. Cyril & Methodius Byzantine Catholic Seminary located in Pittsburgh, PA.

Organizational Structure

GCU was officially organized under the laws of Pennsylvania on March 20, 1893. The society is authorized to transact business as a fraternal benefit society and may offer annuities, life, and accident & health products. As a fraternal benefit society, GCU qualifies as a tax-exempt organization under IRS tax code 501(c)8. GCU's legal name was Greek Catholic Union of the U.S.A. until the most recent quadrennial convention when the delegates voted to change the legal name to GCU.

In 1994, the society formed GCU Holding Company, Inc. (GHC) to develop a residential community on real estate owned by GCU adjoining its home office and country club complex. GHC's two major investments are Seven Oaks Country Club, Inc. (SOCC) and GCU Real Estate Company, Inc. (GREC). GCU Agency, Inc. (GCUA) is a licensed insurance agency that provides members access to products not offered by GCU. GCUA recently entered into an affinity marketing agreement with Nationwide Mutual to offer personal lines coverages (vehicle, homeowners, and pet health) to GCU's members. GHC and its subsidiaries, SOCC, GREC, and GCUA, are for-profit corporations.

In 2008, GCU helped to establish The GCU Foundation, a 501(c)(3) charitable entity separate from the fraternal benefit society, to advance the interests of the society's members and engage individuals who are interested in learning more about the Byzantine Catholic Church. The GCU Foundation advances the above initiatives by making monetary grants for charitable, educational, and religious purposes.

Mergers & Acquisitions On January 1, 2000, United Society of the USA, another Pennsylvania-domiciled fraternal, agreed to merge into GCU adding 2,500 new members. The merger was approved by the Pennsylvania Insurance Department in March of the same year.

Corporate Governance

As a fraternal benefit society, GCU operates under a lodge system consisting of the home office, districts, regional lodges, and subordinate lodges. Lodges and districts are groups of dedicated community members who support the GCU mission of protecting families, promoting faith and fraternalism, and strengthening communities. Lodge membership has always been part of the fabric of GCU since its founding. The society's supreme legislative and judicial authority is the national convention which is held every four years.

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Lodge # 83

Members 8,835

Largest Lodges (as of 8/31/2017)

Loc at ion

Lodge # Members

Home Office

8358

2,667

Loc at ion Wisconsin (statewide)

GCU's constitution also provides that special sessions may be called in the interim to conduct business. Lodges in good standing, as prescribed in the society's bylaws, are entitled to send delegates to the national convention as the voting representatives. The national convention's attendees include officers and members of the board of directors and the delegates selected by the districts/lodges. The most recent national convention, June 2016 in Atlantic City, NJ, had 257 delegates representing membership.

Management Team

Gregory Vladika Chairperson

GCU Board of Directors

George Juba President/CEO

George Kofel Vice Chairperson

Timothy Demetres CFO

Production Services Quality Control Specialist

TBD Executive Vice President/COO

Executive Assistant

Chris Wong Controller

Pam Prodonovich Call Center Mgr.

Basil Wahal Frat.-Comm Dir. Managing Editor

Tom Hartos IT Director

David Ennis Director of Field Sales

John Harbist Policy Service & Claims

Director

George Lopata Director of New Business & U/W

George Juba, president and chief executive officer ? Juba has served as national president and chief executive officer of GCU since April 2007. Before being elected president, Juba was GCU's national secretarytreasurer from 1996 to 2007. He also serves as a board member for several community organizations, including Beaver County Salvation Army, Beaver County Educational Trust, and Beaver County Foundation Board. George earned a bachelor's degree in accounting from the University of Miami (FL) as well as a master's degree from the University of Scranton.

[Open], executive vice president and chief operating officer ? This position was recently vacated. The society is actively seeking a replacement and plans to fill the role in the near term.

Timothy Demetres, chief financial officer ? Demetres joined GCU in 2016 as chief financial officer. Prior to joining GCU, he was with The Penn Mutual Life Insurance Company for 6 years where his role was chief accounting officer. He also previously served as assistant corporate controller of The Guardian Life Insurance Company of America. Demetres earned his bachelor's degree in accounting from Syracuse University and is a Certified Public Accountant.

Product Overview

GCU offers fixed annuities3 and life insurance, whole life and term, actively in 22 states. In 2015, the society entered into a partnership with Aetna to offer Medicare supplement insurance options to its members.

ANNUITIES GCU's primary offering is annuities, both deferred and immediate annuities. The society offers single and flexible premium deferred annuities, single premium immediate annuities both involving and not involving life contingencies. GCU does not offer variable annuity products. Consistent with many fraternals, the guaranteed minimum interest rates (and crediting rates) on GCU's annuity offerings has been higher than those of commercial carriers' products. Current spreads on the society's annuity products are in the range of 150-250 basis points across the various offerings. Throughout 2008 to 2012, GCU underwent a product transition to

3 Annuities are not insured by the FDIC and qualified annuities can carry an IRS penalty for distributions prior to age 59?.

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remove its longer duration and higher minimum guaranteed rate products in favor of a newer suite of products. This suite of products included, notably, the following deferred annuities: 1+4 Option, Triple Advantage, 5 Year Advantage, and Flex 8. GCU projects continued growth in this product line and year-to-date through Q3 2017 the society has generated $167.6 million in first year/renewals and processed $23.5 million in conversions.

Please reference Appendix D for historical crediting rates charts of GCU annuity products (current and discontinued).

Note: % of Total Annuity Reserves, as captured in the below tables, is reflective of the deferred annuities. It does not include the reserves ($23.1 million as of 9/30/2017) for the immediate annuities.

1+4 Choice

Product 1+4 Option

Guaranteed Rate 1.0% 3.0%

Policy Count 1343 608

Reserves $35,843,542 $33,898,876

% of Total Annuity Reserves 2.6% 2.5%

GCU's 1+4 Choice Deferred Annuity is a five-year investment product with an optional election feature: the annuitant may choose to surrender the contract during a 30-day window that begins on the first contract anniversary with no surrender charges. The initial interest rate is guaranteed for the first year and upon the first contract anniversary, and for 30 days thereafter, the policyholder has the option of: 1) continuing the contract for the remaining four years. The credited rate for each subsequent year will be based on the Five

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Year Advantage new issue crediting rate, 2) surrendering the contract during the 30-day window, and converting to a new 1+4 Choice Deferred Annuity, or 3) surrendering the contract completely without incurring a surrender charge.

Issue Ages: No age restrictions Minimum Guaranteed Rate: 1.0% Credited Rate (as of August 2017): 1.15% Initial Rate Guarantee Period: One Year Withdrawal provisions: This contract does not allow for any surrender charge free withdrawals during the first year. Surrender charges in the first year are 9%, and are reduced by 2% in each subsequent year of the fiveyear contract (9% - 7% - 5% - 3% - 1%). Additional deposits: Currently, the maximum dollar amount of deposits into a 1+4 Choice Deferred Annuity is $200,000 per annuitant, per calendar year. This maximum applies per annuitant regardless of the number of contracts in force.

Triple Advantage

Product Triple Advantage

Guaranteed Rate 1.0% 3.0%

Policy Count 893 697

Reserves $31,032,353 $24,926,442

% of Total Annuity Reserves 2.3% 1.8%

GCU's Triple Advantage Deferred Annuity is a three-year investment product that offers a fixed rate of interest for the entire three years of the contract. Limited surrender-charge-free withdrawals are permitted in the second and third contract years.

Issue Ages: 0-95 Minimum Guaranteed Rate: 1.0% Credited Rate (as of August 2017): 2.00% Initial Rate Guarantee Period: Three Years Withdrawal provisions: This contract does not allow for any surrender charge free withdrawals during the first year. Surrender charges in the first year are 5%, and are reduced by 2% in each subsequent year of the three-year contract (5% - 3% - 1%). Additional deposits: Currently, the maximum dollar amount of deposits into a Triple Advantage contract is $200,000 per annuitant, per calendar year. This maximum applies per annuitant regardless of the number of contracts in force.

Five Year Advantage

Product 5 Year Advantage

Guaranteed Rate 2.0%

Policy Count 3639

Reserves $185,554,002

% of Total Annuity Reserves 13.6%

GCU's Five Year Advantage Deferred Annuity is a five-year investment product; however, surrender charge free withdrawals are available in each contract year.

Issue Ages: 0-88 Minimum Guaranteed Rate: 2.0% Credited Rate (as of August 2017): 2.85% Initial Rate Guarantee Period: Two Years Withdrawal provisions: GCU currently allows for surrender charge free withdrawals in each contract year. Year one = 10% of the initial deposit; years two through five = 20% in each year based on the account value at the end of the previous contract year. Withdrawals exceeding the permitted amounts will be subject to a surrender charge. Surrender charges in the first year are 9%, and are reduced by 2% in each subsequent year of the five-year contract (9% - 7% - 5% - 3% - 1%).

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